50% Shareholder Didn't Owe Fiduciary Duty To His 50% Co-Shareholder

This week's decision from the Business Court in Maurer v. Maurer, 2013 NCBC 44 is a continuation of the litigation between Jill Maurer and the company owned by her and her husband, which was the subject of three Business Court opinions in 2005 and 2006, in 2005 NCBC 1, 2005 NCBC 4, and 2006 NCBC 1.  And that case even went to trial, yielding a $1.6 million verdict for Mrs. Maurer against Slickedit's then CEO.  A portion of that verdict was set aside by Judge Tennille in  2006 NCBC 1.

After all that previous litigation, what could be left to fight about?  Well, the Maurers had gotten divorced during the earlier litigation, and each departed the marriage with a 50% ownership interest in Slickedit.  Business lawyers know that a 50/50 split is a recipe for disagreement and disaster, and the situation in which the ex-spouses found themselves was no exception. 

Mrs. Maurer sued her ex-husband in March 2013, who had by then become the company's CEO and only director.  She alleged that he had excluded her from any knowledge of or participation in corporate affairs, notwithstanding her 50% ownership.  There was a "consistent deadlock" between the Maurers, and Mrs. Maurer said that her ex-husband's conduct was in violation of his fiduciary duty owed to her individually and that she therefore had a direct claim against him.

Mrs. Maurer needed to show a fiduciary duty owed to her because in the absence of such a "special" duty the general rule is that "shareholders lack standing to bring individual causes of action to enforce actions accruing to the corporation."  Op. 21.  Those types of claims must be pursued on a derivative basis, on behalf of the corporation.

Judge Gale dismissed the fiduciary duty claim, ruling that there is no fiduciary duty "in favor of one fifty percent owner against the other fifty percent owner who has effective control."  Op. 24.  In the absence of a direct claim against her ex, all Mrs. Maurer had was a derivative claim, on behalf of the corporation, against Mr. Maurer.

What was the reasoning behind this ruling?  Fifty percent shareholders have options that may not be available to shareholders with a smaller interest.  The Court said that a less than fifty percent shareholder might face

insurmountable hurdles because of the procedural requirements for derivative actions which can be manipulated by a controlling majority. A fifty percent owner, with the ability to impose an impasse, is not in the same precarious position. An equal owner, unlike a minority owner, can automatically create a deadlock on any matter requiring a shareholder vote, and the existence of such a deadlock may afford greater access to judicial dissolution and a limit on the control of the other shareholder. See N.C. Gen. Stat. § 55-14-30.

Op. 26.

Judge Gale recognized that the allegations of the derivative claim were "admittedly thin," but let the "liberal standards of Rule 12(b)(6)" dictate the outcome. Op. 37.  He said that "[d]erivative litigation should not be the forum for claims that are, in essence, really domestic disputes."  Op. 37.

Congratulations to my colleagues Walt Tippett, Jennifer Van Zant and Eric David, who represented the Defendant.

"Common Interest" Privilege Considered By The NC Business Court

How much of an ownership interest does a parent have to have in a subsidiary for the attorney-client  privilege to extend to communications between the susidiary and the lawyer for the parent company?

Judge Gale pondered that question in SCR-Tech v. Evonik Energy Services LLC, 2013 NCBC 42, and wrote on a clean slate, given that he found no applicable North Carolina precedent.  Op. 8.

The Plaintiff, SCR-Tech, had been owned by a holding company in which Ebinger had a minority (37.5%) interest.  The communications withheld on the basis of privilege covered a three year period during which SCR-Tech, Ebinger, and counsel were negotiating the sale of SCR-Tech.

Defendants said that to be considered SCR-Tech's "parent," Ebinger needed to be a majority owner with a greater than 50% interest.

That argument launched Judge Gale into distinguishing the "joint client" aspect of the attorney-client privilege from the "common interest" doctrine.  He said:

The “joint client” privilege focuses on client identity as defined by the extent of corporate relationship between two entities. The “common-interest” doctrine depends more on common legal interests between the separate entities, although the fact of corporate affiliation between them can factor into the analysis of that common legal interest.  The common-interest doctrine has arisen by expanding the joint-defense doctrine in criminal law, which was not controlled by any ownership relationship.

Op. 12.

The extent of Ebinger's interest in SCT-Tech really didn't make much difference to the analysis, given the two companies' common legal interest in the matters discussed in the withheld communications.

The Court held that the documents in question were privileged and denied the Defendants' motion to compel their production.

Judge Gale cautioned that "the court here does not intend to set rigid parameters for applying the common-interest doctrine, and this Order must be read in the context of the particular facts of this case."  Op. 12 & n.1.

Business Court Awards $38,000 In Fees For Opposing Party's Failure To Comply With Discovery Order

Have you ever billed a client nearly $65,000 for pursuing a motion to compel? Maybe you routinely handle mega-cases and you aren't goggled by the size of that kind of fee  But that was the amount of the fee sought last month, in Out of the Box Developers, LLC  v. Logicbit Corp. following Plaintiff's win on a motion for sanctions growing out of a discovery dispute.  It was sizeable enough to catch my attention.

The case is about the Defendants' alleged theft of Plaintiff's customizations to its case management software.  The Defendants' product, aimed at  use by bankruptcy attorneys, is marketed under the name HoudiniEsq.   During discovery, Plaintiff requested production of the version of HoudiniEsq used by one of the Defendants in May 2010, which would have allowed Plaintiff to isolate the customization to the software as of that time.

Despite an April 12, 2013 Order from the Court directing the production of that version of the software, the two Defendants at which the Order was directed -- The Doan Law Firm and Doan Law, LLP -- failed to comply.  Judge Gale ruled in 2013 NCBC 32 that there was no justifiable reason for the noncompliance. Op. 41.  He found it egregious enough to warrant the "severe sanctions" allowed by Rule 37(b)(2) of the North Carolina Rules of Civil Procedure.  Op. 44.

Instead of imposing those severe sanctions -- like striking pleadings or barring the Defendants from defending against a claim as allowed by Rule 37(b)(2) --  Judge Gale ruled that the Plaintiff should be reimbursed its "reasonable costs and expenses" associated with the several motions to compel made necessary by the Doan Defendants' failure to produce the software.

The issue of the reasonableness of the costs and expenses was decided by the Business Court in 2013 NCBC 34.  Plaintiff's lead counsel had filed an Affidavit requesting an award of $63,714.57.  That was based on fees the fim had billed for three motions to compel and the hearing for sanctions which led to the Court's final discovery ruling.

 

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Two Things To Avoid When Opposing A Motion For Summary Judgment

There aren't any great business law proclamations in Allran v. Branch Banking & Trust Corp., 2013 NCBC 41, decided late last week, but there a couple of procedural points that might help you avoid having summary judgment entered against your client.

Be Careful Which Defendants You Decide To Dismiss, And How You Dismiss Them

Judge Murphy granted summary judgment on Plaintiff's unfair and deceptive practices act claim against Defendant BB&T. The ruling was entered pretty much because Plaintiff submarined his own case in two ways. 

First, he dismissed his claims with prejudice against BB&T's employee, Corbett.  Plaintiff's claim against BB&T rested on his allegation that Corbett had forged his initials on his financial statement and loan application leading to the defaulted loan at issue.

Be aware that a dismissal with prejudice is equivalent to a disposition on the merits, and it has res judicata effect.  Thus, because "[a] judgment on the merits in favor of the employee precludes any action against the employer where . . . the employer's liability is purely derivative."  Op. 38 (quoting Wrenn v. Maria Parham Hosp., 135 N.C. App. 672, 681, 522 S.E.2d 789, 794 (1999), the dismissal of Corbett's employer, BB&T, was appropriate.

Be careful of which Defendants you dismiss from your case, and try to avoid dismissing them with prejudice.

Don't Try To Contradict Your Own Client's Deposition Testimony

The second way in which the Plaintiff did in his case was by his own deposition testimony, in which he admitted that he had placed his initials on the documents which he had said carried his forged initials.  He attempted, after discovery closed, to avoid summary judgment by presenting affidavits designed to contradict that testimony.

Judge Murphy rejected those affidavits, holding:

‘[A] non-moving party cannot create an issue of fact to defeat summary judgment simply by filing an affidavit contradicting his prior sworn testimony[.]’   Having
acknowledged in his deposition that the initials on the Retail Loan Application and
Personal Financial Application were his, Plaintiff should not now be allowed to offer
affidavits that call his testimony into question.

Op. 35 (quoting Carter v. W. Am. Ins. Co., 190 N.C. App. 532, 539, 661 S.E.2d 264, 270 (2008).